Uganda has a second chance to industrialise

In this fifth and second last part of our Insight series on late industrialisation, Juma A. Okuku looks at what role Uganda Investment Authority and Uganda National Council for Science and Technology can play in bringing about industrial transformation. The first part was published in Issue 035.

Uganda Development Corporation (UDC) became the main mechanism for implementing the post-colonial state-led ISI industrialisation process as it had a successful past record as an initiator of projects both on its own and in co-operation with the private interests. UDC was organised along commercial lines with the government as the sole shareholder, with normal managerial operations left to the directors and executives. UDC’s collaboration with private actors such as Madhivan Group and Mehta Group created the mixed structure of private and public participation in the manufacturing sector.

By the mid 1960s, UDC dominated the industrial scene and through subsidiaries and associated companies it had formed active partnerships with privately owned enterprises.

The 1970s saw these initiatives disrupted leading to economic collapse and industrial decimation following the ‘economic war’. The expropriation of the non-Ugandan businesses was followed by an ad hoc allocation of the businesses to the public sector and Ugandans who had little industrial culture in terms of technical know-how and organisation.

The public sector expanded as expropriated industries were allocated to UDC, causing a strain on the managerial and financial capacity of UDC. This was followed by the creation of several new parastatals. By 1971, UDC had 36 subsidiaries and 22 associated companies. After 1972, more than 100 companies were appendaged to UDC causing operational strain. This created problems for UDC whose management, engineering, accounting and marketing capacities were now constrained.

‘˜Re-organisation’™ of the public sector

In 1974, several industries were taken away from UDC. With government creation of several new parastatals, the industrialisation process was disrupted. Many of the viable subsidiaries of the UDC group, such as Nytil and Uganda Cement Industries, were allocated to new parastatals. By the second half of the 1970s, with all viable manufacturing units allocated to the new parastatals, UDC was reduced to a skeleton staff only in the headquarters.

The creation of new parastatals created an institutional and policy nightmare. Several parastatals created were given the responsibility to manage the expropriated industries. Among these were: National Textile Board (NTB), National Tobacco Corporation (NTC), Uganda Cement Corporation (UCC), Lint Marketing Board (LMB), Produce Marketing Board (PMB) and Uganda Steel Corporation (USC). This presented several policy-making problems leading to institutional difficulties.

The ‘managers’ of the new parastatals lacked both managerial competence and entrepreneurial skills. The private individuals who acquired the smaller businesses had soon stripped them of most assets. The new parastatals were largely used for state patronage. While earlier on they were sources of tax revenue, in form of corporate taxes, rents, licences and rates, they now depended on the government for survival.

By 1979, the average capacity utilisation of industrial concerns was down to about 20%. Mismanagement took its toll on efficiency. Employment levels dropped, as did contribution by industry to foreign exchange earnings. From being an exporter of some industrial products, particularly in the East African region, Uganda became a net importer only ten years later.

The attempts at rehabilitation in early 1980s could not revive the industrial sector. The return of the various nationalised firms to UDC as a way of reviving the industrial sector was futile. UDC was no longer the entrepreneurial agency that it had been in the 1950s and 1960s. Little changed in the industrial sector in the early 1980s.

The 1990s witnessed widespread privatisation of public enterprises to mainly foreign ‘investors’ and the ethno-political clients of the NRM regime. There has been intensified reliance on FDI and aid as means of financing industry.

The financial woes of industry can be noted in the collapse of local banks. A developmental state aiming at industrial transformation cannot afford to let temporary liquidity problems close major banks.

The failure to capitalise UDB has led development finance to recede into insignificance. There is need to revive UDB and finance cheaply the medium and long-term projects rather than the current reliance on commercial banks in development financing.

The un-strategic privatisation and liberalisation of banks and other financial institutions has restored the grip that foreign interests had on the direction of the Ugandan economy prior to independence. Foreign interests now determine the overall orientation of the domestic economy through the control of economic policy and financial infrastructure.

Patronage

The financing of industry has not escaped the patronage politics and networks that have been constructed in Uganda’™s ‘free market’ economy. Rather than enhancing local industry through financial support, government on a number of occasions sunk massive resources in failing companies where the political leadership seem to have personal stakes. The major beneficiaries have been the Asian and local politically connected entrepreneurs.

Government picked the debts of several Asian businesses belonging to M.N Mehta, Madhvani and Sekhar Mehta. State support for industry is a legitimate undertaking if the industry is critical to the country’™s development. But the support for the above is not in areas that could be considered critical to Uganda’™s economy.

The same Groups (Mehta and Madhvani) are to benefit from the present crazy land giveaways by government to investors. What explains the offer of these subsidies to these particular groups? Such subsidies are often approved of by the World Bank representatives in Uganda who are over-seeing the implementation of SAPs. The support for the Asian propertied class partly advances the interests of foreign capital in Uganda.

The second explanation is that the Asian entrepreneurs lack local political power. The result is that they have to seek alliance with the local ruling elite for their mutual benefit and protection. In return for political protection, the Asian class is expected to contribute funds to service the numerous patronage networks of the rulers. In return, the government has had to allocate state resources to them, especially land.

The idea of focused industrial policy has further been scattered by the creation several specialized agencies dealing with matters related to industrialization.

Specialized agencies

Numerous specialized agencies were created as a result of reforms: Uganda Investment Authority (UIA), Uganda Revenue Authority (URA), Uganda National Council of Science and Technology (UNCST), The Uganda Export Promotions Board (UEPB), and Privatization Unit (PU) among others. Most important for our case is UIA and UNCST.

Uganda Investment Authority

UIA broad function is to promote, facilitate, supervise and market Uganda’™s investment opportunities through a coordinated national investment programme. Since its institution, UIA has provided the environment in which investments have surged.

The officials at UIA brought out the thinking behind its operations. First, that UIA has a competent bureaucracy. The administrative capacity is underpinned by meritocratic recruitment of staff. In an interview with Mr K. Kyoratungye, director, Strategic & Management Information System Division, the incentive regime was justified that the ‘World over incentives are given to reduce costs of start-up and encourage first time investors’.

The officials agreed that that UIA has not been able to monitor and verify whether the investors created jobs as is usually claimed in their investment proposal. Kyoratungye was of the view that, ‘There is no need to flow-up whether the proposed job creation is implemented or not. Government or UIA cannot determine the schedule for investors. Companies find it difficult to maintain expatriates so in the end they employ locals’. This attitude defeats the objective of investment. As policy implementers, the bureaucrats at UIA must ensure the implementation of the investors’™ claims if they are to be beneficial to and enhance capacity of industrial sector and the national economy in general.

The officials at UIA confirmed that ensuring technological transfer is not made a central demand on the investors at the time of application for the investment licence. According to Mr Mukasa Issa, director of Investment System Division, ‘There is no need to demand for technology transfer agreements or registration as Uganda’™s economy is fully liberalised’. This is perhaps the weakest part of UIA.

Both officials at UIA noted that there are no conditions set on re-investment in Uganda’™s economy. Mr Kyoratungye argued that ‘re-investment is a question of demand and supply: What is required is establishment of a friendly environment where there is reliable power supply, road networks, serviced land’ and re-investment shall occur.

Finally, while there have been lots of investments in terms of quantity, the issue of quality and systematic sectoral focus has been left out.

Council for Science and Technology

The national science and technology system is coordinated by UNCST. Enacted in 1990, UNCST function is to advise government on and co-ordinate the formulation of an explicit national policy on all fields of science and technology and also assist in the promotion and development of indigenous technology. Several years later, there was no explicit national science and technology policy

Mr Barugahara, I.N, the assistant executive secretary, argues that UNCST conducted the research with particular resource constraints which has supported policy formulation. Second, he was supportive of the current policy that emphasises importation of technology. Third, he pointed out one major weakness is lack of policy ‘networking’ with other institutions. Fourth, technology policy is compounded by low levels of the funding of Science and Technology S&T by government.

According to 2005/06 national budget, ‘S&T as a percentage of government expenditure increased from 3.3% in 2004/05 to 3.7% in 2005/06’. It remains minimal as the larger burden of funding national technological advance is left largely in the hands of ‘donors’.

Secondly; the linkage between UNCST and local firms is hardly stressed. Under the influence of neo-liberal thinking, the bureaucrats at UNCST as those in UIA have not crafted mechanisms through which technology transfer could occur.

Several issues arise. First, the creation of new agencies resulted in further bloating of the public service. The down side of this expansion was that meritocracy in recruitment into these agencies, as has become of the central public service, was thrown to winds. These specialised agencies were turned into arenas for patronage by dispensing state jobs to the clients of the political class, rather than on professional merit and competence basis.

The government has had some success in collaborating with the private sector in policy making as seen in its relationship with the Uganda Manufactures Association (UMA).